Question

To promote competition and consumer welfare, the Federal Trade Commission requires firms to advertise truthfully. How does truth in advertising promote competition? Why would a market be less competitive if firms advertised deceptively?

Short answer

The truth in advertising helps promote competition by providing consumers information that is necessary for them to make optimal decisions.

If the firm advertises deceptively, then consumers will not be able to compare the goods and will get stick to one good, making it less competitive.

Step-by-step solution

Truth in marketing provides the necessary information to the customer

When firms advertise truthfully, it enables the customer to gather the necessary information to make optimal decisions.In the absence of a true advertisement, a consumer will not know the true picture of the market, creating a problem of asymmetric information and causing the market to fail.

Deceptive advertisements results in consumer sticking to one good

Deceptive advertisements convey wrongful information to consumers. This results in a lack of awareness about the quality of the different products or misleading purchases of bad quality products. Eventually, the customers lose trust and stick to the product they are used to buying and find satisfying. This reduces the competition in the market.